Pension reform warning to bosses

Thousands of employers with a total of 2.8m employees who are contracted out of the State Second Pension (S2P) in company schemes should "reconsider this as a matter of urgency", actuaries warned yesterday after the Government suggested further reforms of retirement rules.

Along with another 500,000 people with personal pensions opted out of S2P – formerly known as the State Earnings Related Pension Scheme (Serps) – they are being short-changed by more than £3bn a year, according to Deborah Cooper of actuaries Mercer Consulting.

Dr Cooper explained: "The rebates of National Insurance Contributions they receive for contracting out of S2P would need to be increased by about £1bn per annum to compensate them for the benefits they are giving up.

"Under the proposals announced by James Purnell, minister for pensions reform, the rebates are likely to become smaller after 2012. So employers with company schemes which are contracted out should reconsider this as a matter of urgency," she said.

In his response to the Work and Pensions Select Committee's report on retirement reform, Mr Purnell yesterday dismissed calls for across-the-board higher State pensions, saying a single-tier or 'Citizen's Pension' would be unaffordable and "would undermine the 'something for something' principle".

Instead, the Government is considering a flat-rate S2P, when the earnings link is restored for the Basic State Pension after 2012. The earnings-related element of the S2P will be withdrawn gradually and will disappear by around 2030.

Mr Purnell said: "We are looking at radical simplification of the additional state pension so that people would receive a flat-rate top-up for every year spent working or caring.

"That top-up might be, for example, an amount worth around £1.40 for every qualifying year. This would provide people with much greater clarity about what they can expect in retirement.

But Steve Bee, head of pensions at Scottish Life, pointed out: "It is only a few years since S2P replaced Serps and it looks as if a new, flat rate and more redistributive pension will replace S2P by 2012. So much for simplification.

"But Mr Purnell has totally failed to address the problem that means tests impose an effective tax rate of 40pc on many pensioners. They will be punished for saving because each £1 they put in their pension will only mean they are 60p better off than they would have been if they did not save but relied on State benefits."

Similarly, Mervyn Kohler, of the charity Help the Aged, said: "Despite the mood music, our system remains one of the meanest state pension schemes in the developed world."